Subsidies are unrecovered costs of public provision of
non-public goods and services financed by the budget.
Subsidies, as converse of an indirect tax, constitute an
important fiscal instrument for modifying marketdetermined outcomes.
While taxes reduce disposable income, subsidies inject
money into circulation.
Taxes appear on the revenue side of government budgets,
and subsidies, on the expenditure side.
Narrow subsidies are those monetary transfers that are
easily identifiable and have a clear intent.
They are commonly characterized by a monetary transfer
between Governments and institutions or businesses and
Example- Government payment to a farmer.
Broad subsidies include both monetary and non-monetary
subsidies and is often difficult to identify.
A broad subsidy is less attributable and less transparent.
Example- Environmental externalities.
A production subsidy encourages suppliers to increase the
output of a particular product by partially offsetting the
production costs or losses.
Objective- expand production of a particular product
more so that the market would promote but without rising
the final price to consumers.
Example- Enterprise Investment Scheme, Industrial
Policy and Regional Policy.
A consumption subsidy is one that subsidises the
behaviour of consumers.
It is most common in developing countries where
Governments subsidise such things as food, water,
electricity and education on the basis that no matter how
impoverished, all should be allowed those most basic
Example- ‘lifetime’ rates for electricity.
An export subsidy is a support from the government for
products that are exported, as a means of assisting the
country’s balance of payments.
Most common in China.
An employment subsidy serves as an incentive to
businesses to provide more job opportunities to reduce the
level of unemployment in the country (income subsidies)
or to encourage research and development.
Example- Social Security Benefits
In economics, an externality is a cost or benefit that
results from an activity or transaction and that affects an
otherwise uninvolved party who did not choose to incur
that cost or benefit.
In this, the business is effectively gaining a net benefit but
not compensating those affected.
ECONOMIC EFFECTS OF
Shift in Demand curve
Shift in Supply curve
Spill over effect
Government actions and policies that restrict or restrain
international trade, often done with the intent of
protecting local businesses and jobs from foreign
Typical methods of protectionism are import tariffs,
quotas, subsidies or tax cuts to local businesses and direct
Spillover effects are externalities of economic activity or
processes that affect those who are not directly involved.
Spillover effects are those variables in every economy
that cannot be adjusted by a single policy monitored by
RATIONALE ABOUT SUBSIDY
Subsidies are justified in the presence of positive
externalities because in these cases consideration of social
benefits would require higher level of consumption than
what would be obtained on the basis of private benefits
Primary education, preventive health care, and research
and development are prime examples of positive
Subsidies often promote inefficiencies.
Over-subsidisation could adversely affect
environment and allocation of resources.
Subsidy given on fuel can make the beneficiary to
over use it and thus create environmental pollution.
Similarly farmers over utilization of fertilizers.
Fiscal deficit is the difference between the government’s
expenditures and its revenues excluding the money it’s
A country’s fiscal deficit is usually expressed as a
percentage of its GDP.
Current fiscal deficit 4.89% GDP.
Causes for fiscal deficit.
How bad can fiscal deficit be.
Difference from CAD.
Current scenario about fiscal deficit.
SUBSIDY BILL – BUDGET 2013/14
* Subsidies bill estimated at 2.48 trillion rupees from 1.82
* Petroleum subsidy seen at 650 billion rupees in 2013/14
* Revised petroleum subsidy for 2012/13 at 968.8 billion
* Estimated 900 billion rupees spending on food subsidies in
* Revised 2012/13 fertiliser subsidy at 659.7 billion rupees
FOOD SECURITY BILL
Estimated budget is 1.23 lakh crore.
Finance minister P. Chidambaram had allocated Rs77,740
crore as food subsidy in the budget estimates for the
current fiscal and kept Rs10,000 crore over and above the
normal food subsidy, towards the incremental cost.
This will impact fiscal deficit by 0.5%.
It would add to Rs 25,000 crore annually to the food
SUBSIDY ON FUEL
Increase in consumption of diesel.
State owned oil companies incurred a loss of Rs.40,500.
Oil subsidies accounted for 16 % of the fiscal deficit in
the last budget.
Current year fuel subsidy accounts to 26% of the total
Large commercial users like malls have also increased
their diesel use.
They are being subsidised by the government to the
extent of Rs 13 on every litre used.
Subsidy amount on each LPG cylinder is Rs.565 amounts
to approximately around Rs.4000 crore.
SLASHING PRICE SUBSIDY
India desperately needs to woo foreign investors if it is to
return to rapid economic growth.
Govt provides domestic and foreign investors with fresh
tax and other concessions, while slashing subsidies for
working people and the rural poor.
The lowering of the deficit to GDP ratio, especially
through cuts to subsidies for fuel, fertilizer, and staple
FM Chidambaram led a major cost-cutting drive, ordering
across-the-board cuts in all departments and ministries
aimed at reducing expenditure for 2012-13 by almost 6
The budget calls for the petroleum subsidy to be cut by 33
percent to 650 billion rupees for the 2013-14 fiscal year,
from 968.8 billion rupees.
Government will raise 500 billion rupees through tax-free
10 percent surcharge on the approximately 42,000 Indians
with taxable incomes above 10 million rupees .
A 5 to 10 percent surcharge will also be levied on
domestic corporates whose income exceeds 100 million
rupees a year.
Duties on mobile phones, cigarettes and luxury vehicles
have also been raised.
Increase of total government spending by 16.4 percent to
16.65 trillion rupees for the current fiscal year from 14.3
The increase in spending is based on the higher tax
revenue projected from a highly optimistic growth target
of between 6.1 and 6.7 percent
If not the government will slash spending, as it did in the
final months of past fiscal year, with social spending the